401(k) Nation: Road To Retirement Gets Rockier

Broker and financial adviser Jim Lacamp has been in the business long enough to remember when Americans had little stake and even less interest in the stock market.

It was a time when "people had a pension and profit-sharing plan that was run by [their] company," says Lacamp, senior vice president at Fort Worth, Texas-based Macro Portfolio Advisors. "They might see what a stock did on the news, but it didn't really have an impact on their daily lives."

Then came the Reagan years and laws that promoted the 401(k), a new financial instrument aimed at helping individuals save for retirement. The 1980s just happened to coincide with a time when the baby boomer generation was starting to think about its golden years. It was a combination of events that infused trillions of dollars in individual and company contributions into the stock market and forever changed how Americans viewed Wall Street.

"The population became far more attuned to the stock market, far more aware of the stock market and far more educated about the stock market," Lacamp says. But he says he still thinks most people are "hugely undereducated" about how it all works.

A Bumpy Ride

The roller-coaster ride that Americans boarded in the 1980s started with a steep climb to the first hill that convinced many first-time investors that they were on to something that didn't have a downside, says Alicia Munnell, director of the Center for Retirement Research at Boston College.

"We had an enormous bull market from 1982 to 2000, with the exception of '87, which bounced back pretty fast," Munnell says. "So, everybody thought they were really clever and were very good investors."

The first real sign of trouble came with the bursting of the dot-com bubble in 2000, when technology stocks — a favorite of gadget-savvy baby boomers — tanked. It shook confidence, but most people poured back into the market, convinced it was only a blip. In 2008, when the Dow Jones industrial average dropped 7 percent amid the Lehman Brothers collapse and the financial bailout, Americans were jolted again.

Confidence In Stocks Wavers

"Now we have whatever is happening today," Munnell says, referring to the wild market gyrations that saw the Dow swing hundreds of points last week. What we're seeing is the "aftermath of America's love affair with the stock market," she says.

"I think there's been a change in how confident they feel and how secure they feel about planning for retirement," she says.

Even so, of the estimated 60 million 401(k) participants, 87 percent have at least a portion of their portfolio in stocks, according to the Investment Company Institute, or ICI, a national association of U.S. investment companies. Four out of 10 401(k) participants have upwards of 80 percent in stocks.

Teresa Ghilarducci, a labor economist at the Schwartz Center for Economic Policy Analysis at the New School, says that while 401(k)s have turned average Americans into investors, they still act like human beings. "They panic," she says.

Ghilarducci characterizes 401(k)s as "do-it-yourself pensions." She says most investors can't afford truly independent financial advice, so instead they rely on brokers who themselves have a conflict of interest.

"They are getting marketing advice in the form of education," she says. "We haven't learned anything, because we are being taught by people who are really trying to sell us something."

Ghilarducci says 401(k)s have been extremely lucrative for Wall Street financial firms that she says have grown rich on "huge investment advisement fees and management fees over and above the return."

Anxiously 'Staying The Course'

Investors saving for retirement have shown a decreased appetite for risk since the 2008 crisis, acknowledges Sarah Holden, the ICI's senior director of retirement and investor research.

But through thick and thin, most Americans have stuck it out in stocks, she says.

That anxiety is particularly acute among people who are nearing retirement. Many of those people can expect to live 20 years or more, and the market swings have encouraged them to stick it out longer in riskier investments to build up reserves and recoup earlier losses in the market, Boston College's Munnell says.

"We have a retirement system where people's individual investments determine what they will have for income to support themselves in the last years of life," she says. "But we live in a crazy world. And the two taken together make for sleepless nights."